Rating agency ICRA has on Friday said that it has maintained a stable outlook for the two-wheeler OEMs for the next 12-18 months despite the ongoing slowdown in two-wheeler sales and near-term volatility anticipated due to the transition to BS-VI. This is supported by expectation that credit profile of two-wheeler original equipment manufacturers (OEMs) will continue to remain strong despite moderation in earnings. Further, demand weakness in the domestic market has been partially offset by healthy growth in exports (6.5% up in 8M FY20). The ratings agency expects BS-VI vehicle prices to be higher by 10-12% from their BS-IV counterparts, leading to some pre-buying in Q4 FY20. However, the demand may remain subdued in H1 FY21 as consumers adjust to the new normal. While expectation of improvement in rural sentiment following better rabi crop inflows is expected to drive the motorcycle demand, the demand for scooters is expected to remain muted because of weak sentiments in urban markets and slow pace of employment generation.
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The domestic two-wheeler segment reported volume contraction for the twelfth consecutive month in November 2019, intensifying one the steepest demand slumps since FY08. The domestic volumes declined 15.7% on y-o-y basis in 8M FY20 as consumer sentiments remained subdued. The same were cumulatively impacted by increased cost of vehicle ownership resulting from regulatory changes — insurance premium hikes and Anti-Lock Braking System (ABS) to combined braking system (CBS) transition requirements, coupled with rising fuel cost and stretched liquidity.
According to ICRA, weak rural sentiments (primarily affecting entry-level motorcycles) due to a poor rabi season in FY19 were exacerbated by delayed and uneven monsoon precipitation in FY20. This led to late sowing and flooding across various regions, which may impact the kharif crop output and farm incomes during the year. Moreover, uncertainty around income growth in the backdrop of weak industrial activity and limited employment generation opportunities adversely affected consumer sentiments in urban centres.
With weak-retail offtake, a few OEMs undertook unscheduled factory shutdowns to prevent pile-up of inventory with their dealers. The festive season provided only a transitory respite despite the discounts offered by the OEMs. Nonetheless, this helped OEMs correct BS-IV inventory at dealer level before the building-up stocks for the BS-VI variants.
Overall, ICRA expects industry volumes to contract 8-10% in FY20, with some moderation in the decline in H2. Amidst subdued demand and high cost of production of BS-VI portfolio, the operating margins of two-wheeler OEMs are expected to moderate marginally from current levels. Nonetheless, their credit profiles are expected to remain strong, supported by healthy accruals and financial flexibility from sizeable cash and liquid investments on the books. The OEMs are expected to continue to invest towards new product development, technologies (like electric vehicles) and enhancement of domestic and overseas sales network.